As the impacts of COVID-19 started to permeate across Europe’s commercial real estate markets in the latter half of the first quarter, signs started to emerge of slowdown and reversal of generally positive trends evident at the end of 2019.

Nigel Almond, Head of Data Analytics in Cushman & Wakefield’s EMEA Research & Insight team, commented: “While the European commercial real estate markets posted solid annual growth of 3.9% in 2019, the fastest rate since the recovery from the Global Financial Crisis, 41 out of 48 markets tracked posted no growth in Q1 2020. This is the highest number since records started in 1992 as both landlords and occupiers sought to pause and reflect on the impacts of the pandemic.”

Office was the strongest performing sector with rental growth up 0.4% quarter on quarter and 3.6% year on year. No office markets registered a fall in rents over the quarter with growth restricted to just a handful of locations. Some of the UK’s regional office markets – Leeds (+6.7%) and Edinburgh (+5.7%) benefitted from improved demand and more positive sentiment in the wake of a clear UK election result in December. Hamburg (+3.4%) and Berlin (2.6%) continued the positive growth story of strong demand and low vacancy seen across many German cities.  

Office yields continued to see modest compression, with the European all office yield down 6bps to 4.23%, with falls mainly in the CEE, Germany, Benelux and UK markets. It is likely that this marks the low in the current cycle, with outward shifts of some degree expected in a majority of markets over the course of 2020.

Retail remained in negative territory, reflective of the broader structural change in the sector reeling from the rise in online sales, and which temporary store closures will only accelerate further change. To date rental growth has been limited to a handful of markets, however, sentiment is turning negative, with the vast majority of the 46 retail markets tracked now expecting falling rents and outward yield movements over the course of 2020.

The logistics sector maintains a degree of resilience with still positive rental growth and yield compression. Rents rose 0.1% over the quarter pushing annual growth to 2.5%, albeit down on 3.2% last quarter. Although supply chains remain critical in the pandemic, the sector is not immune to weaker trade. Only four markets registered growth in Q1 2020 compared to sixteen in Q4 19, with two of these markets in the Netherlands – The Hague (+9%) and Rotterdam (+1.5%).

Almond added: “Looking forward, sentiment is generally more positive in the logistics sector as supply chains remain critical for the distribution of essential goods. Limited supply in key locations means we do still see potential pockets of rental growth moving forward, largely across Germany and the Benelux markets. These will be the exception to the rule of broader stability at the prime end of the market.”